ABI Journal

Third-Party Litigation Funding: Where Do We Go Now?

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4 ABI Journal – March 2018 The TPLF industry markets itself aggressively to law firms (which the industry correctly perceives as its most likely referral source) as a way to solve cash-cycle woes. 11 TPLF has emerged as big business with the potential for huge upside. Whether TPLF is the savior of underdog litigation for those without resources to protect and prosecute rights and claims, or "contingency fees on steroids," it has become commonplace in civil litigation and an increasingly common dynamic in the bankruptcy arena. Brief Historical Context Although TPLF is a relatively new concept in the U.S., having originated in Australia about 10 years ago, its underpinnings are not new. TPLF is essentially based on the same types of legal relationships addressed by old English legal principles of champerty and maintenance. But there is no need to blow the dust off your Black's Law Dictionary; "maintenance" essentially refers to the practice of generally assisting another in litigating a lawsuit. "Champerty" is a specific form of maintenance; it is maintaining a lawsuit in exchange for a financial interest in settlement or judgment of the suit. Old English law prohibited maintenance and champerty because the practices were thought to encour- age fraudulent or baseless litigation. 12 Owing to the old English prohibition, some U.S. states still pro- hibit or materially limit champerty (e.g., Alabama, Colorado, Kentucky, Mississippi, North Carolina, Minnesota, New York and Pennsylvania ), while others allow it with some restrictions (e.g., Florida, Indiana, Ohio, New Jersey, Tennessee and Texas). 13 Nonetheless, other courts have recognized certain social benefits of TPLF. Litigation funding "allows law- suits to be decided on their merits, and not based on which party has deeper pockets or stronger appetite for protracted litigation." 14 A federal court in Illinois held that "[w] here a defendant enjoys substantial economic superiority, it can, if it chooses, embark on a scorched earth policy and overwhelm its opponent.... But even where a case is not conducted with an ulterior purpose, the costs inherent in major litigation can be crippling, and a plaintiff, lacking the resources to sustain a long fight, may be forced to abandon the case or settle on distinctly disadvantageous terms." 15 In addition, as a New York state trial court held, "Modern litigation is expensive, and deep-pocketed wrongdoers can deter lawsuits from being filed if a plaintiff has no means of financing her or his case. Permitting investors to fund firms by lending money secured by the firm's accounts receivable helps provide victims their day in court." 16 According to a Florida-based U.S. bankruptcy court, "without litigation funders, parties owed money, or otherwise stymied by deep-pocketed judgment debtors, might have reduced or no ability to pursue their claims. Litigation funders may be essential to the provision of legal advice in such cases." 17 11 See Travis Lenkner, "The Role Legal Finance Can Play in Firm Year-End Collections," Law360 (Sept. 21, 2017). Lenkner is a managing director of Burford in Chicago. See also Sam Reisman, "Burford Clinches Portfolio Funding Deal with U.K. Firm," Law360 (July 31, 2017); Aviva Will, "Law Firm Economics: Comparing the Costs of Self Finance vs. Outside Finance," Burford Capital Publication (Nov. 16, 2017); Cristina Violante, "What Your Colleagues Think of Litigation Finance," Law360 (Dec. 11, 2017) (approximately "86 percent lawyers that have used [TPLF] view it favorably!"; and "[TPLF] is no longer solely used for impecunious clients... it's a corporate finance tool"). Rodriguez adds, "some lawyers are wary of how much say a funder gets in a law firm's operations as relationships deepen." Maya Steinitz, a University of Iowa Law School professor who has studied the TPLF industry, says, "The big concern... is control— that funders are looking over [lawyers'] shoulders, providing input that the lawyers don't necessarily welcome or agree with.... This is viewed as interfering with how lawyers are doing their job." See Maya Steinitz, "The Litigation Finance Contract," 54 Wm. & Mary L. Rev. 455, 457 (2012). 12 Of course, some argue that, but for baseless litigation, many lawyers would have no work at all, and our beloved "adversarial system" is at least somewhat fairly characterized by the notion that out of the clash of lies truth will emerge. Canada appears unfriendly to TPLF. See, e.g., Andrew Strickler, "Rebuke of Bentham Deal May Chill Canada Class Suit Funding," Law360 (Sept. 18, 2017) ("A recent decision by a Toronto judge throwing cold water on a third-party funding deal from Bentham IMF for plaintiffs in a medical device case may severely hamper interest from commercial funders in backing future Canadian class actions, experts say. In August, Ontario Superior Court Judge Paul M. Perell, one of just two jurists who oversee class actions in the country's foremost financial and business hub, called for significant changes to an 'uncapped' deal between international litigation funder Bentham and a couple suing over allegedly faulty heart implants, finding that an open-ended termination provision would allow Bentham 'to control whether and how this litigation will proceed.' While a challenge from the plaintiffs is already in the works, the August ruling invites strict court limits on returns for commercial investors and will likely set a precedent for tight control over deals deemed too favorable to inves- tors, according to experts."). 13 See Risto Pribisich, "Maintenance, Champerty and Usury: Ethical Issues Of Alternative Litigation Financing," ABA Presentation (2015); John Beisner and Jordan Schwartz, "How Litigation Funding Is Bringing Champerty Back to Life," Law360 (Jan. 20, 2017) (discussing two cases that invalidated TPLF agreements based on, among other things, concepts of champerty); Michael McDonald, "The Best And Worst States for Litigation Finance (Parts I and II)," Above the Law (June 28 and July 11, 2017); see also Justinian Capital SPC v. WestLB AG, 65 N.E.3d 1253 (N.Y. 2016) (New York Court of Appeals invalidated TPLF agreement on basis that it violated cham- perty restrictions under Judiciary Law §489 (1)); Frank v. TeWinkle, 45 A.3d 434, 438 (Pa. Super. 2012) (stating that "champerty remains a viable defense in Pennsylvania"); Maslowski v. Prospect Funding Partners LLC, 2017 Minn. App. LEXIS 26 (Minn. Ct. App. Feb. 13, 2017) (court refusing to enforce New York forum-selection clause on litigation to enforce TPLF agreement based on public policy and Minnesota's prohibition on champer- ty). 14 Lawsuit Funding LLC v. Lessoff, Index No. 650757/2012, 2013 WL 6409971, at *6 (N.Y. Sup. Dec. 9, 2013). 15 Miller UK Ltd. v. Caterpillar Inc., 17 F. Supp. 3d 711, 718 (N.D. Ill. 2014). 16 Hamilton Capital VII LLC I v. Khorrami LLP, No. 650791/2015, 2015 WL 4920281 at *5 (N.Y. Sup. Aug. 17, 2015). 17 In re Int'l Oil Trading Co. LLC, 548 B.R. 825, 835 (Bankr. S.D. Fla. 2016). California is not as restrictive. See, e.g., Del Webb Communities Inc. v. Partington, 652 F.3d 1145, 1156 (9th Cir. 2011) ("'Champerty' generally refers to an agreement in which a person without interest in another's litigation undertakes to carry on the litigation at his own expense, in whole or in part, in consideration of receiving, in the event of success, a part of the proceeds of

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